Can You Trust Chinese Economic Data? (w/ Chris Balding and Mike Green)

October 12, 2019

MIKE GREEN: Mike Green.
I’m here for Real Vision in Los Angeles, and
I’m sitting down with Chris Balding, who most
people that watch Real Vision probably have
heard something about you either on Twitter
or in the news, but you and I came into contact
over Twitter.
Your background is as an economics professor
who was based in China, and started talking
very openly about it.
First, how did you end up in China?
CHRISTOPHER BALDING: The first time I ended
up in China was one of the greatest stories.
My wife had a job here in LA doing homes for
rock stars.
She had a very bad job she wanted to get out
of and so I actually pretended to be her sending
out her resume.
She got a US-based headhunter that offered
her a job on Wednesday, and she had to be
in Beijing to start Monday morning.
I still remember the conversation telling
her, “Honey, I might have found you a job.
It’s in Beijing.”
That conversation did not go super well the
first time, but we ended up going to China
for 9 years and had a great time.
MIKE GREEN: When you went over, initially,
you went over as a bit of a China file?
I actually went over really knowing even then,
after a couple of months in China, knowing
very, very little about China.
As a junior professor, I was focused on knowing
the very standard, turn out journal articles
and academic books and things like that.
That’s really what I did for the first, probably
almost 5 years of my career there at PKU.
MIKE GREEN: What started the change at Peking
What led you to start speaking out and writing
about some of the concerns that you had in
terms of– whether it was China accounting
issues, or whether it was China’s behavior
on a national account basis?
What was the trigger?
CHRISTOPHER BALDING: The first couple years,
I would say really 3 to 5 years that I was
there, I really felt like I knew so little,
that I was just really learning and asking
questions and everything like that.
I remember– and I don’t mean to pick on this
guy, but I remember Joe Biden coming to China
and writing an article in The Washington Post
or New York Times about how China was the
future and the US needed to emulate them.
At that point, having lived there for– I
forget the exact timeline, 4 to 5 years, I
was like, well, this is what’s being written
in the US press and this just isn’t matching
what you’re seeing on the ground– whether
it was inflation data, or whether it was all
the underlying problems that weren’t being
That was really the first time I started just
At that point, I think it was just my mom
and a couple of her friends that were reading
what I wrote.
MIKE GREEN: Your mom obviously liked it, you
kept writing.
Did you encounter blowback in China immediately,
or did that build over time?
CHRISTOPHER BALDING: Honestly, without any
hesitation, I can say I never had the school
really push back on anything I wrote about
I’m sure that people at my school got phone
calls about what I wrote.
I can honestly say I never got any pushback.
The only time that I know of that I got pushback
about things that I wrote about China was
really involving China only tangentially and
that was when there was a case where there
was a gentleman in Singapore that hung himself
and here was some question as to whether or
not it was potentially Chinese military that
might have been involved in his death, we
still don’t really know to this day.
He had told friends that he was being pressured
to work for Chinese military in high grade
microelectronics work.
I had written about Singapore, and I knew
some of the cast of characters that he was
involved with, and they were Chinese military
industrial companies that their armor, their
weaponry is really involved in really almost
any hotspot in the world.
I mentioned them in passing about with this
Singaporean death.
Other than that, honestly, nothing I wrote
in China did I get any real official or unofficial
request to take anything down.
MIKE GREEN: When you ultimately decided to
leave China– so you worked at Peking University
until late 2017, early 2018, and then you
came back here briefly, what was the decision
process in terms of the decision to leave
Peking University?
CHRISTOPHER BALDING: The decision went like
In this late summer of 2017, I had started
a petition about Cambridge University Press
censoring some of their articles on China
and I had created petition for foreign universities
and academics to just reevaluate their relationship
with China.
I was scheduled to start teaching in November
2017 and the way it worked at our school was
they would open up the registration system
for students to register for classes about
a week to 10 days beforehand.
I had been in touch with the school in the
spring, summer, and early fall about my class.
When they opened up the registration system,
I started getting emails from students.
I was going to take your class, Professor
Balding, but it’s not listed.
I emailed the school, and they said, oh, well,
we’ll check into that.
Mind you, this was roughly a week to two weeks
after Chairman Xi was reelected for life,
and the next day after emailing the school,
the school informed me that I was no longer
teaching in all of 2017-’18 and my contract
would not be renewed at the end of the year.
I suspect, I don’t know that that was, for
lack of a better term, a decision that was
taken outside of the school to terminate my
The school and I had had, like any normal
working relationship, there’ve been issues
over the years, I don’t think there was anything
there that had been significantly outside
of ordinary or anything that was unresolvable.
MIKE GREEN: To the extent that you and I have
talked over the years about some of these
dynamics, one of the sources for a lot of
your information on a lot of the questions
that you delved into were your students.
You had it sounded like you had a very good
relationship with most of your students and
were well respected certainly as a teacher.
When I looked up your reviews at Peking University–
I’m joking, I didn’t look it up, but it did
feel like this is a fairly sudden acceleration
in terms of your relationship with China more
I think one of the things that even for me,
I think it was very informative.
You really begin to feel China change in 2012.
When I first arrived in 2006 and 2009, in
relative terms, China seems– looking back
now, almost open in freewheeling.
Things really began to change in 2012 when
Xi was there and I think those changes really
began to accelerate in, let’s say, 2014-’15.
I remember just some of the incidents, I had
a journalist call me up some time, I want
to say it was 2016 or so, saying, hey, I need
a pro-China commentary on this specific issue.
This was something that would have been pro-party,
pro-Beijing, this wasn’t looking for an activist
position and I called up a couple of colleagues
saying, hey, there’s this journalist, would
you mind doing this?
The couple of colleagues that I called up
said, no, I’m not going to comment.
You can’t comment in China today.
Don’t ask me again.
It was very interesting to me that there was
such even– and this was a couple years, this
was probably two years before I left– of
how much the environment in China had changed
that people didn’t even want to say pro-party
things publicly.
MIKE GREEN: Well, one of the things that you
and I have discussed somewhat ad nauseum is
the dynamic that began to emerge with Xi’s
ascension, I would phrase it as, in particular,
there seems to be an obsession with the decline
of the Soviet Union and the advent of Perestroika
and the opening up that occurred in the Soviet
Union prior to its dissolution roughly 1990.
From what I understand and from what we’ve
talked about, that seems to be a very key
focus in terms of the CCP and in particular,
Is that consistent with how you think about
I think that is probably one of the biggest
things that is missed in everything that’s
being discussed about China is Xi is almost,
in my estimation, singularly focused on not
just the collapse of China, but the accompanying
numerology that is there right now.
One of the ones is– and I might be wrong
on the name of the plan, but I believe leave
it was the Soviet Union was on its 13th 5-year
plan, and China is in the middle or near the
end of its 13th 5-year plan right now, and
the Soviet Union did not see a 14th . Xi is
singularly focused on not just having a 14th,
but on making sure that he does not replicate
what he sees as the errors of the Soviet Union
that led to its demise, specifically, opening
and liberalization.
MIKE GREEN: That’s consistent with the discussion
we’ve also had, which is my contention is
that this is also very true that Xi is very
focused on this dynamic of 13th to 14th plan,
the mistakes of 1989.
The way I look at it is that if you were working
assiduously to avoid the mistakes of 1989,
you’re almost guaranteed to repeat the mistakes
of 1936-’37, which was when Stalin was made
Emperor for life or appointed for life as
both head of the party and head of the Politburo.
The equivalent cultural reformation that accompany
the time period in which the Soviet Union
withdrew from the West and ’36-’37 ultimately
culminating in the Ribbentrop, do you see
it similarly, or do you think there’s a different
dynamic at work here?
CHRISTOPHER BALDING: No, I think you’re seeing
a very similar dynamic play out.
One of the things is the people I continue
to talk to in China is you hear things about
how much sentiment there is to retake Taiwan.
You hear about, well, Hong Kong should be
grateful to China.
You hear all of these types of things.
Well, we’re just turning Xingjian into China.
We have to do this.
There’s this cultural imperative to make China
great again, for lack of a better term.
I think there’s a very similar dynamic.
I don’t think, when we talk about the US or
other countries working with China, I think
there’s a very static understanding of how
China views itself domestically and how China
views itself in reasserting itself and taking
its place as an equal or looking down upon
the United States.
Part of that is this like almost cultural
cleansing that they seem to be going through
right now to elevate China again.
Unfortunately, I see these dynamics playing
out very, very similarly.
One of the alternate takes, so I would argue
two primary narratives.
One is China’s the future.
This is the Joe Biden articulation, which
is difficult to square with many of the facts
on the ground, but certainly remains, I would
argue, the consensus view.
The second one is that no, China is not the
future, but it’s going to manage it similarly
to Japan, that it’s going to have a step down
in growth, that it’s going to age and therefore
have deflationary pressures, and probably
an appreciation of the yuan as they seek financial
power and global power in terms of the financial
sphere as compared to the manufacturing or
outright growth.
Then the third one is the China collapse model.
What do you think about that middle one, the
idea that China can gracefully go the route
of Japan?
CHRISTOPHER BALDING: I was talking to someone
a couple years ago in Beijing, and I was talking
about the debt pressures that China was facing.
I was unconvinced that Beijing even understood
the severity of debt problems.
I asked this person I said, do you think they
understand the severity?
He said, absolutely, they understand the severity,
but you’re looking at it as if there’s a problem
there to be reformed.
I was like, what do you mean, of course, they
have to reform?
He said, no, no, their goal is to just become
Japan, not Thailand.
I think internally, in the bureaucrats’ minds,
debt is not a problem as long as they can
essentially always stay one step ahead of
a plate that might fall off.
However, that is becoming even the Japan model,
more and more difficult.
Not to say that they’re going to become Thailand,
but the greater the debt pressures become
both on domestic debt and on foreign debt,
you have to elevate it one step above Japan
if you’re going to make sure that you don’t
become Thailand and what that requires is
almost going the DPRK model of financial repression.
I think more and more, that is what you are
seeing is that level of financial repression.
Just as an example, we’re seeing a lot of
evidence that there are essentially price
mandates on real estate prices.
Just this week, we’re seeing– just over the
past couple weeks, we’re seeing evidence of
financial repression with regards to pork
sales and subsidies, and you need identity
cards to purchase pork.
I think what you’re seeing is for- – they’re
realizing it and it’s going to be more and
more difficult for them to even become Japan
and if they do that, to make sure they don’t
become Thailand, they have to become more
financially and socially oppressive at every
step of the escalation.
MIKE GREEN: Well, it’s also interesting, because
I think there’s a bit of a misunderstanding
of what Japan is.
Japan became rich, flirted with the idea of
do we want to become a global superpower?
Do we want to challenge the United States?
They somewhat rationally looked at it and
said, no, and therefore chose a path that
allowed them to benefit from the assets that
they had accumulated abroad, somewhat of the
cost of domestic production.
They seated share but gained income.
That seems to have changed under Abe, and
so there’s this debate about whether Japan
still looks like Japan under that context,
I would argue, Japan is one of the countries
that has the most exposure to China in terms
of the value of the Japanese yen that seems
underappreciated on the street.
That does seem like a really difficult path
for a country that is fundamentally quite
China has $3 trillion in reserves, but that’s
$2,000 per person.
It’s just not that much money.
If they’re looking at that type of difficulty,
where they think it’s really hard to become
Japan, do you think they go the DPRK or North
Korean route?
CHRISTOPHER BALDING: I think if you just look
at the evidence right now of where Xi is taking
them socially and financially, I think you
have to believe that yes, that is the direction
they’re going.
If you just take one example, I think there’s
pretty strong evidence that over the past,
say, year or so, they’re working very, very
hard to lower their import bill.
Specifically, one example of this would be–
a lot of their import bill comes from two
primary areas– imports for processing and
imports for natural resources that they use
as inputs.
One of the areas where they seem to be working
very hard to lower their import bill is in
iron ore.
How they’re doing that is they’re essentially
shifting to domestically produced iron ore
that is let’s say anywhere from 10% to 20%
premium, but at this point, at least, they
don’t have to expend FX reserves.
I was talking to someone, they actually ran
the calculations, well, if China has enough
cobalt reserves, turn out batteries, what
is the payoff period for them to essentially
go all electric with batteries and lower their
import bill through lower oil purchases?
They said within five years, it’s not crazy
to think that that is on their to do list
to essentially shift away from international
transactions in oil, because we see that happening
right now with iron ore.
If they can essentially say, we’re going to
cut our natural resource import bill significantly,
it’s not crazy to think that they are essentially
going to that model in the international trade.
We see that happening already in the social
realm of how much they continue to tighten
up and control speech on financial matters.
I stay abreast of Chinese language, IB research,
and even a lot of the IB research has censorship
mandates about they can and can’t say.
That DPRK model is clearly something that
they’re at least trending towards, even if
they don’t go quite that extreme.
MIKE GREEN: It’s interesting, because this
is the thing that you would expect to see
and it can have two outputs.
Over the course of 18 months, if you decide
that you’re going to deemphasize imported
iron ore, seaborne, primarily, and emphasize
domestic production, the immediate reaction
from most purchasing managers is I’m going
to buy as much seaborne ferrous with higher
iron or content, the 62% plus stuff as fast
as I possibly can so I get ahead of these
purchasing restrictions.
It shows up as a positive impulse into the
global iron ore markets.
We saw this, we saw the prices rise, and now
they’ve been falling as this import substitution
takes hold.
The other thing that’s interesting about that
type of behavior is it ends up increasing
pollution, destroying productivity, because
you can’t run the higher technology, steel
foundries, with lower iron ore content, lower
purity domestic sources.
They’ve depleted their highest iron ore content,
ores, and now they’re using lower and lower
which leads to tremendous amounts of slag
build up, et cetera in their product, they
just can’t do it.
Paradoxically, they’re going to end up in
a less productive, weaker position through
this choice, but it is a choice for autarky
basically, they want to reduce that import
I think that seems to be the direction that
they’re very clearly moving.
I think fundamentally, the backup issue is
that they’re quite worried about their foreign
exchange position because even as reserves
have essentially stagnated for a couple of
years, money has continued to grow relatively
significantly, such that if there’s any problem,
that is going to put a real dent in their
FX position, especially with all the foreign
denominated debt they have coming down.
MIKE GREEN: Well, when you say money has been
growing, what you’re really referring to is
the broader credit system, not the actual
currency in circulation, per se?
The currency in circulation has been growing
in the low mid-single digits and credit has
been continuing to grow, let’s say at 11%
to 13% range over that time.
MIKE GREEN: 13% seems right.
When you think about where there’s an endgame
here, what can cause a reckoning in China?
CHRISTOPHER BALDING: The way that I always
think about a reckoning is people always talk
about– well, they can keep printing money
and this type of stuff.
I think of it less as a direct credit type
of event.
What I mean by that is, they can always print
more money, and they can always close themselves
off more.
When you talk about what is going to do that,
you’re typically looking for– and I hate
this term, but some type of Black Swan event,
types of things that we’re not expecting.
When you think about China, the types of scenarios
that you would say, okay, what would be an
unexpected type of event?
The types of things that you would not expect
is people say, well, real estate is heavily
overvalued, and that’s an accurate assessment.
But generally speaking, the loan to value
ratios on those accompanying loans, unless
you’ve bought within the past 2 to 3 years,
are such that it’s not going to cause a banking
Any significant fall in real estate, however,
may prompt people to take to the streets,
but it’s not going to cause a banking crisis.
People have such faith in real estate that
they just expect it to go up by double digits
every year, no questions asked.
When I lived in Shenzhen, the apartment I
lived in would have sold for probably $2.5
It was roughly 1500, 1400 square feet and
the average wage of the person who lived there
and worked for the electrical company as the
developer was probably capped out at $20,000
to $30,000 in official terms, so you can do
the math from there at what is that roughly
100 times down.
That is an astounding– that’s an absurd ratio.
One of the things we’ve seen is cities and
provinces that have been instituting essentially
price floors, where they won’t let transactions
take place if it’s beneath a certain price
That gets to the really the societal fear,
even if there’s not a significant financial
risk for most of the broader economy is that
they don’t want prices to fall, because that’s
going to create, for lack of a better term,
a real societal risk.
There’s people that track where riots or conflicts
take place in China and one of the more common
reasons that riots or conflicts take place
in China is a developer will sell 50% or 75%
of a development and then they’ll lower the
prices for the remaining 25% of units or something
like that.
The people who’ve already bought come out
and riot asking for the same price cut.
Those are the types of things that keep Chinese
technocrats and Chinese politicians up at
night is if they ever have to announce broad
based falls in asset prices, like real estate.
MIKE GREEN: When you think about something
like that you think about that type of environment
in which that’s a risk and levels are 100
times income, the United States put it in
contrast in an urban environment, you’re typically
going to see 8 to 10 times with much lower
levels of homeownership.
It tends to reflect a wealthy individual in
New York City or Los Angeles being able to
afford a home when many people can’t and therefore
live 50 miles away and commute in.
When you talk about a place like Shenzhen
in those types of multiples, what’s enabling
What’s allowing that to be serviced at this
How do people actually afford to do this?
CHRISTOPHER BALDING: What you will typically
see is that basically, families or extended
families, et cetera will basically pool their
money to purchase an apartment.
I had a student that he and his fiancé were
pooling their money, and then their parents,
each parents on each side were pulling their
This all went into purchasing an apartment
for this new family.
This actually generally matches household
wealth data that we see because even though
in China, there’s this fabled myth that household
have a 40% savings rate, the implied rates
are actually much lower.
Actually Chinese household savings rates,
they have household liquid financial wealth
numbers that are much more in line with Mexico,
Brazil, Russia, which have significantly lower
household financial wealth numbers, and have
also seen lower rates of return over time.
Either China is saving much less, or the rates
of return that they’re seeing on financial
assets is much lower, you simply can’t reconcile
this 40% savings rate number with the rates
of return that they’ve claimed unless that
number, unless those financial assets are
being consumed in household savings.
MIKE GREEN: Well, this is one of the things
that I think people struggle with, and the
difference between household accounting and
national accounting.
In a household accounting basis, you and I
think of our savings as the dollars that we
don’t spend, that we put into the bank or
into another investment account.
In a national accounting system, it’s really
a solution set for how much money has been
spent on investment, in particular, capital
investment, but other forms as well.
By definition, in national accounting terms,
savings equals investment, and therefore,
the Chinese are saving a lot because investment
is give or take 40% of GDP.
Is that a fair characterization?
CHRISTOPHER BALDING: Yes, I think that’s a
fair characterization.
MIKE GREEN: If I were to look at the actual
cash flow dynamics of an individual Chinese
household, what would you guess the actual
savings rate is?
CHRISTOPHER BALDING: I think, if we can take
like a little bit of a range, I would say
that the number is probably somewhere between
about 15% and 25% of income.
You really can’t justify based upon other
implied data that it’s any number really above
25% and it’s difficult to argue that it’s,
let’s say in the high single digits or low
To take a range, I’d say 15% to 25%.
MIKE GREEN: When we stop, and we think about,
again, their system of national accounting
and the way we account for it here in the
United States, we don’t include in our savings
numbers things like social security or Medicare,
which is money that is theoretically being
taxed and set aside for future consumption,
i.e. savings.
It’s invested in the form of government bonds
that are purchased by a government entity.
These are actually very similar levels.
If I take the US 6%, and I add roughly the
15% Social Security and Medicare burden combined
between households and corporate sector, they’re
basically like us.
CHRISTOPHER BALDING: Very, very similar, yes.
Because one of the things is, is that in China,
even though they have a technical guarantee
of medical care, that really provides for
very little.
There’s a lot of pre-emptive savings, where
a lot of that savings is essentially set aside
for cancer or other medical care, things like
that, other transitory shocks being out of
One of the one of the reasons why those household
financial asset levels are much more in line
with your Mexico’s and your Brazil’s, is because
there’s a lot of consumption of that preemptive
savings for medical care, Social Security,
et cetera, et cetera.
MIKE GREEN: When we think about– so there’s
more vulnerability at the household level
and as you’re saying, where we’ve seen incidences
of effectively writedowns, developments, that’s
been a cause for demonstrations and an attempt
to get the developer to refund the difference
or to rescind the price decreases.
CHRISTOPHER BALDING: Yes, that’s correct.
MIKE GREEN: How had the state responded to
those types of events?
CHRISTOPHER BALDING: In most cases, they urged
the developers to try and negotiate and there’s
typically some type of arrangement where everybody
gets a 10% discount or something like that.
There’s also cases where they call in the
riot squad and clear it and everybody that
had a contract is forced to buy and they just
delay those sales of those additional units
for another couple of years when people are
already locked in or something like that.
However, generally speaking, it just goes
on a case by case basis as long as the problem
goes away.
MIKE GREEN: When we think about some of the
developments that are currently in play, so
the African swine fever has resulted in pork
shortages, we’re seeing this in wholesale
price, pig prices beginning to surge in China
in advance of the Chinese New Year and I guess,
the traditional time for making pork soup,
which is turning into an issue.
How do they think about the capacity of the
population to rise up similar to what we’ve
seen in Hong Kong, or the increased resistance
we’re seeing from Taiwan?
Is it more will come to an accommodation,
or is it more, we’re going to bring out the
water cannons or the actual cannons?
CHRISTOPHER BALDING: This is just speculation
on my part, nothing more, but they are very
smart in Beijing.
One of the things you have to keep in the
back of your mind as a possibility is that
they know that the economy has been stressed
for a couple of years, since 2015.
They know that there are significant stresses
in the economy, and so one of the things that
you have to consider is that they have been
building up this surveillance capacity.
They’ve been building up this censorship capacity
for preparing for exactly these types of scenarios.
So whether it’s pork, whether it’s real estate
development, whether it’s making sure that
news about Hong Kong is sold in the way that
Beijing wants to be sold, you have to consider
that they’ve been preparing for exactly these
types of scenarios, so that they can keep
any types of dissent from getting out of hand.
And if it does, they can respond in almost
real time to a gathering of people in this
part of town, a riot in this part of town,
complaints about the price of pork in this
WeChat group so that they’re ready for all
those types of scenarios.
MIKE GREEN: This is a theme that I’ve expressed
as well.
The deal since Deng Xiaoping has been don’t
protest don’t complain, we’ll make you rich,
the natural conclusion from that is if you
conclude, you can no longer make people rich,
you need to install the surveillance systems
that prevent them from protesting.
It feels like that’s what much of the development
that you’re referring to has been focused
It’s a realization that things are going to
be less good going forward and so you need
to be prepared with crowd surveillance and
instantaneous response.
I think, even for us, living in China, we
always knew that we were going to be monitored
and expected that and we never posted pictures
of Tiananmen Square on WeChat, for instance,
but I think even in the last year we were
there, my wife comes home sometime in the
spring of 2018 and there was this intersection
where she would take my son, and she’d get
on the bus– and my son liked getting on the
She comes home one day, and she’s like, oh,
my gosh, this bus stop, which is not even
in a major intersection.
She’s like, they put up a massive bank of
security cameras so that it basically just
on one corner, everything on the intersection
from 10 different angles would be covered,
and of course, it had facial recognition and
could zoom in on different people.
Just even within the past, let’s say two years,
the level that they have gone to, I think
by any standards, even by Chinese standards,
is quite surprising.
MIKE GREEN: When you think about the local
reaction, your wife, obviously, as a foreigner
is attuned to this, the local reaction from
your students, from others that you were in
contact with, how did they think about this
rise in surveillance, or is it it’s just something
they can’t escape?
CHRISTOPHER BALDING: It’s something that they
can’t escape but I will say I think there
are people– I think there’s a good number
of people in China that are worried about
this, because I think they’ve always known
that they lived in an authoritarian state
but it also is not lost on anyone that they
are just barely ahead of the DPRK in being
able to access information.
I was talking to someone that I would consider
in China, a relative political and financial
elite and this was in the spring of 2018,
I was at a conference.
This was somebody that was in the system.
They weren’t a party member.
I was talking to them, and they said there’s
a lot of worry about the direction that China
is heading and they went to one of the elite
schools in China, and they said at a recent
reunion, this dominated the conversation about
people being worried.
If you go to an elite school in China, you
are part of the system to some degree.
You may not be a party member, you may not
be an elite civil servant or vice minister,
but you’re in the system to some degree.
You’re vested in the system.
To hear people talking like that definitely
gives me some hope that there is some valid
concern and I’ll give you one more story.
About 18 months ago, I forget the exact timeframe,
a senior Chinese tech official made a joke
on WeChat that the CEO of WeChat could read
all of his text messages.
It prompted quite the outpouring of concern
all throughout China, it’s like a damn released
all throughout China about people talking
about being concerned that basically anybody
at WeChat can read their messages at any time,
and the government being able to read what
they say.
This is definitely something that’s bubbling
under the surface of people having this concern
about privacy, whether it’s on WeChat, whether
it’s out in public, and so I wouldn’t call
it let’s say, I wouldn’t call it a hot button
It’s definitely bubbling beneath the surface
that people are very aware of.
MIKE GREEN: It’s one thing to be bubbling
and aware of.
Is there a prospect of it boiling over?
Is there a realistic prospect of anything
challenging the direction that it seems to
be going?
CHRISTOPHER BALDING: I don’t think in reality
that that is possible yet.
We haven’t had one of those events within
China that we know of.
We haven’t had one of those events.
The way that I think helps me think about
it is there’s definitely enough bubbling discontent
about Xi and the CCP that you will hear people
talk very privately and quietly with phones
stowed very far away but it’s still not anything
that people will say with any degree of public
The word that I would use to think about it
is, there’s a lot of very fragile support
for what’s happening in China, so that as
long as there isn’t a significant downturn,
as long as there isn’t that event that makes
Xi look weak, for lack of a better term, there’s
going to continue to be support for Xi and
the CCP.
If there is, for instance, a 25% drop in real
estate prices, if there is a significant downturn
in the economy, something like that, that
could change very rapidly.
However, I would not expect that to happen
anytime soon.
MIKE GREEN: A historical example I believe
we’ve talked about is the German stock market
under the Nazi regime, which was viewed as
a point of national pride.
It was perceived as bad.
Some other administrations might think this
as well, if the stock market went down, and
so a rule was put in place between 1933–
I think it was actually ’34 that it was put
in place– in the end of World War II in which
transaction could only occur at an all-time
high price.
The German stock market only went up in a
similar fashion.
What you’re describing is something identical,
where they’re basically saying, the only transaction
that can ever happen is one at a higher price,
and so we’ll see falling transaction numbers.
But prices remain elevated, and nobody has
a cause to believe that their property is
worth any less.
Does that feel accurate?
Is that what you think is happening?
Because we are seeing transaction volumes
fall fairly sharply, even as prices remain
If you take the example of real estate, and
I haven’t looked at this in about six months,
but there were cities that were at, by my
calculations, 100-year turnover rates, and
their prices were still going up.
MIKE GREEN: Just to be clear, when you say
100-year turnover rates, that’s a measure
of turnover relative to the stock of housing?
Basically, if you had 100 units of housing
and you started with unit one and went down
the line, and then started back at the beginning,
it would take 100 years to psych to it before
you got back to the first housing unit.
In like 2007, I think that number was like
at six years in the United States.
You had very high turnover rates.
100-year turnover rates is just absurdly high.
The lowest number that I found in China, I
think, was at roughly a 30-year turnover rate,
which is still quite high.
This gives you an idea that there’s just not
the transaction volume even though prices
continue to go up.
MIKE GREEN: That’s one of the things that
happens under our command economy.
In a market economy prices, higher prices
signal higher activity.
They encourage new supply, they encourage
people to take their existing properties and
sell them.
In a command economy, perversely, you end
up with a bimodal outcome, where prices are
set at an unsustainably high level, demand
is much, much lower, and therefore there’s
very little clearing between the two effectively,
activity stops.
Is there anything that could force liquidation?
CHRISTOPHER BALDING: That’s part of what they
appear to be stopping and they seem to be
trying to address in a couple of ways.
For instance, one of the things is, is that
even though the Chinese household supposedly
saves almost 45% of their income, they’re
now one of the most indebted households in
the world.
They’re more indebted than US households.
It presents a real paradox, how does a household
save 45% of their income and simultaneously
become one of the most indebted households
in the world?
That’s a real puzzle.
One of those things, it’s very difficult to
believe that both of those things are true
and accurate.
On the flip side, we’ve seen a real clamp
down on transactions that don’t meet city
or provincial levels for price for instance.
One of the other things on that command economy
is you’re now looking at a housing market
in China where 25% of apartments sit empty
and the one sector in China that is continuing
to grow at double digits is real estate and
steel inputs to build those apartments.
It seems quite paradoxical that they’re continuing
to channel credit to a sector of the economy
which is at 25% unused and is essentially
deadweight at this point because of population
they’re never going to fill.
MIKE GREEN: Well, it seems paradoxical until
you break it down and say, wait a second,
the sale of land to developers and the building
of those properties is the only way you get
It’s also the only way you generate financing
for local governments.
This is the 19th century variant of the United
States where the funding for local municipalities
came from the sale of public lands.
CHRISTOPHER BALDING: If you look at whether
it’s households or corporations, virtually
all of their security in loan documents is
related to physical assets, primarily either
land or real estate.
If you have that, even if the value, even
if nobody lives there, you can very easily
go and get a loan on that unused apartment.
I know a couple people that found themselves
in situations where they would go rent an
apartment, and then at some point, they would
be living in that apartment and they would
come back, and then there’d be police tape
across the door.
They’d go to the landlord and say, oh, well,
I have to roll over my loans.
Come to find out, what would happen is they
would have an apartment free and clear and
they would go to a bank and they would get
a loan on that apartment.
They would take that loan, go purchase a second
apartment, either free and clear, or maybe
with a 10%, 25% loan on that apartment.
They would then go to a separate bank and
get a loan on that apartment.
They would until they had 10– MIKE GREEN:
Effectively laddering their positions.
CHRISTOPHER BALDING: Yes, until they had 10
apartments on essentially one underlying asset.
That is essentially what you frequently see,
because people are very, very– financial
institutions in China, very happy to lend
out on a specified physical asset.
MIKE GREEN: Ultimately, there’s another variant
of this, which is multiple rehypothecation.
We tend to think of China as this extraordinarily
organized and disciplined bureaucracy but
as I understand it, there’s no Uniform Commercial
Code, there’s no centralized database of who
owes money to whom, that assets are multiply
This is stuff we’ve talked about in the past,
do you think that still continues to hold?
CHRISTOPHER BALDING: I’ve heard multiple stories,
so it’s very, very difficult to pin down what
exactly is happening with regards to purely
financial credit.
What I mean by that is, if this is one reason
why people use different banks.
I can tell you, there’s even been court cases
in China, where there’s been actual recognized
financial bank fraud as a source of conflict.
For instance, there was a case in Shenzhen
where there was going to be a purchase of
a real estate asset, the price that was listed
to the bank was different than the actual
transaction price, and there was going to
be a kickback.
There becomes this dispute, and it goes to
the courts.
Even though the courts recognize that there
was actual bank fraud that took place, nobody
was actually prosecuted for the actual bank
fraud, because there’s such paucity of documentation
between the bank and the listing that gets
recorded at the city.
These are the types of problems that– that’s
why you go into title and you sign all these
different documentation, signed the loan documents,
you signed the title documents, et cetera.
Everybody, there’s transparency in that transaction
and it doesn’t happen that way in China.
MIKE GREEN: Well, that’s one of the things
that I think people tend to forget is that
the systems that have grown up around credit
accommodation in the western regime or the
developed market regime, things like title
Those, by and large, don’t exist in China.
It feels very much if I’m digging into my
financial history, or economic history, like
a 19th century variant of the United States
where wildcat banks have no method of communicating
with other banks in terms of a property that
they’ve lent money out against.
As a result, credit claims multiply relative
to the underlying assets, which again, in
a system of national accounting, until everyone
writes it off, shows up as positive savings.
I can tell you a story of a bank that they
were on third position in a company that they
felt quite strongly was going to go under,
and so if they being in third position, they
were behind two very large banks, they were
going to face significant problems recovering
any assets, and they were going to wipe it
They actually went to their client and said,
let’s put together a deal where we can essentially
buy out two banks ahead of us, we can spin
this off into a private equity type of entity
where it also goes off of our books and so
they actually got one of the two banks ahead
of them to essentially participate in this
“private equity offering”.
Both banks ended up with the loan being officially
taken off of their books, where their clients
participated in the private equity offering
so they listed it as a financial asset, and
the loans went off of their books.
Technically, it’s no longer in the financial
system and both of these banks come out looking
The purpose of that is, is that the banks
now are able to boost their overall balance
sheet even though they essentially are still
backing these products and loans.
MIKE GREEN: This is a mortgage, what you’re
describing here is just a contingent liability.
It’s the exact same underlying dynamic of
structured products in the United States where
a large portion of it was sold off, a fraction
of the asset was retained but there was a
contingent liability associated with fraud
or anything else.
This is the same underlying dynamic, it’s
a thing to quote, Disney, it’s a tale as old
as time.
When you face challenges, speaking, either
to Western investors, or to global investors
who might have a different view of China,
don’t see it with the more rose colored view
of China is the future, it represents a pool
of 1.4 billion possible consumers.
What’s the reaction to your message?
CHRISTOPHER BALDING: The people that have
been there for any significant amount of time,
they know all these stories.
I’ve never met anyone that hasn’t been there
for a few years and doesn’t know all of these
I think in the West, you come to the United
States, you come to Europe, and people have
some idea that some of this is happening but
then you relay some of these stories, and
their eyes just get wide like this.
I have this friend in China, and he had this
great line.
He’s like, the problem with China is you tell
people stories here, and they’re so wild and
crazy that they don’t believe you.
People just don’t believe you at first until
you’ve come over and you’ve experienced some
of what happens in China and you’re like,
wow, these things are actually are actually
I think especially for financial investors,
this is why the largest flows that you’re
seeing right now, are the passive mandate
money, because the active investors I think
are a lot more, generally speaking, reticent
now, having seen some of the problems.
There’s a lot less activity in the active
mandates to really dive in, because there’s
so much concern about the unknown unknowns.
MIKE GREEN: Well, we’re definitely seeing
this on the corporate side.
Foreign direct investment into China in terms
of primary has collapsed.
We are definitely seeing dynamics associated
with things like MSCI rebalancings that is
pulling institutional money in.
They’re looking to match an MSCI all country
exUS passive benchmark, which requires them
to put money into fixed income, it requires
them to put money into equity.
This is purely mechanical, it’s contained
in the 401ks of Americans, it’s contained
in the pension plans and endowments of America
and the rest of the world for that matter.
With no real analysis of the underlying other
than it’s big, it’s a market and therefore,
we should have some exposure to it feels like
that’s the only source of capital that’s going
in at this point.
I think what is so amazing to me is– especially
on like the fixed income side, there’s so
little understanding of China that people
aren’t even looking up the IPO prospectus
is and going through them and looking at the
bond offering document.
Some of the things you’ve heard international
investors take out with regards to provincial
bond offerings and things like that are just
astounding to me, knowing where some of these
places are and hearing some of the things
that they’re going to be doing with this money.
To this day, it never ceases to astound me
that you have people putting in this sum of
money into some of these places, they couldn’t
even find out a map.
MIKE GREEN: They’re doing it for a very simple
They don’t know they’re doing it.
What I’m saying is the marginal investor is
somebody in a target date fund that has exposure
to a Vanguard, or BlackRock or capital that
are just plowing money into an international
bond index or into an international equity
index with no real knowledge, it just comes
out of their paycheck.
Ultimately, the fiduciary responsibility is
offset by, well, we’re just market, we’re
calculating everything.
As long as somebody else presumed somebody
else is doing the work in setting the price,
it seems rational until you realize the scale
of these flows that are unmanaged.
Let’s wrap up and talk very quickly about
what you think is going to happen with the
trade negotiations.
CHRISTOPHER BALDING: My expectation is I would
be very surprised if there was any type of
deal before the election.
MIKE GREEN: Is that driven from the US in
the intransigence of Donald Trump, or is that
driven by China in your view?
CHRISTOPHER BALDING: My primary complaint
about a lot of the analysis that looks at
the trade war, that starts in the United States
is not that we shouldn’t look at Donald Trump
and all that comes with that.
I think there’s too many people that are not
looking at, okay, who is my counterparty?
If I’m in a negotiation, there’s two people
or two sides in a negotiation so I need to
look at, okay, who is my counterparty?
I think there’s, there’s a lot of people that
are not looking at what is the Chinese side.
Let’s just look briefly at the Chinese side,
I think it’s pretty clear for many reasons
that China is really not going to make any
changes to their economic model of any materiality
or significance.
If we look at just how they recentralized
the economy, really over the past, let’s say
5 years– 3 to 5 years.
That’s the entire focus.
I also think, fundamentally, Chairman Xi can’t
make any significance.
Let’s ignore the political side, it would
be politically fraught for him to make any
significant concessions.
But economically and financially, the Chinese
economy is such right now that any significant
changes to that model could create very significant
financial risks and I think they know that.
Whether it’s the banks, whether it’s the heavy
industry that they’re subsidizing, that they’re
keeping afloat these other aspects, I think
there’s an enormous financial risk to Beijing
to making any significant financial changes.
I don’t think you can expect Beijing to make
any financial economic concessions.
If we zoom back out now and look at, well,
how does that change how Trump is going to
be negotiating?
If you’re going in a negotiation and you can
look at the other side and say, I don’t expect
them to make any concessions really, or any
changes to what that I would be asking– and
the other thing is just politically, Beijing
has said, look, we’re great again.
You’re going to have to deal with that.
That puts the Trump administration in no matter
really, what they ask, is it’s probably going
to be no.
Everyone talks about how Trump is going to
cave or he wants agricultural purchases.
I’m not even sure at this point, China is
willing to make those very low level basic
Because if it was, it would seem that maybe
they’ve agreed to it, maybe they haven’t,
but they certainly haven’t followed through
on those pledges that they’re going to do
Regardless of what we have with the Trump
administration, I think it’s pretty clear
that China is unwilling to make any changes
to their economic model of any significance.
MIKE GREEN: I lean towards there’s probably
a component of detente, and if there’s going
to be, it’s going to be in the agricultural
purchases area.
I think China signaled something with the
tariffs in particular, on pork at this point
in time.
It’s the equivalent of Briar rabbit saying,
please don’t throw me into the Briar Patch.
We’re going to prevent you from importing
pork to China when the majority of people
are looking at it like well, wait, the African
swine fever is destroying the Chinese pork
herd, the swine herd, and so they should be
doing the exact opposite.
It feels to me that it’s a very transparent
move to say, this is something that’s really
important to us to protect, and we’re willing
to take that much pain, when the reality is,
is that the imports that are coming in are
from companies like Smithfield, which is a
Chinese company anyway.
They can very easily refund the tariff back
to the corporate entity if they choose to
do so.
This is going to be a fascinating time.
I agree with you with the under explored part
and I think it’s in part because people are
so– the media in particular is so negative
Trump, that they’re very focused on the CPI
impact, who bears the cost of the US tariffs?
They’re spending very little time thinking
about the implications of these tariffs in
the context of can China even accommodate
any former tariff?
It feels to me like China is very close to–
the technical term is broke and any meaningful
change would just accelerate that process.
The easy answer is, let’s say no, and push
it off on the United States and say they’re
the bad guys.
CHRISTOPHER BALDING: I think there’s two broader
themes here which seemed to be happening.
The Trump administration seems to be saying,
I’m going to get material significant change
from China and if I don’t get that, I’m willing
to essentially decouple and essentially move
that manufacturing to other parts of the world.
In fact, what you’ve seen is that US imports
from the world are essentially growing pretty
much on trends, a little bit lower this year
than the boom year we had last year, where
there was maybe some frontrunning of imports,
but they’re growing pretty much on trend.
What this seems to indicate is that those
imports that would be coming from China are
slowly being dispersed to other parts of the
That seems to be one of the gambits that Trump
is making is, if I can’t get significant change,
I’m at least going to cause the pain so that
it has to go to other parts of the world.
China, on the other hand, I think what we’re
seeing which I think is an enormously underreported
area, is that people say global trade is slowing
down because of the trade war.
No, that’s really what’s happening.
You’re seeing imports into China across the
board, regardless almost of product, regardless
of geography, imports into China are falling
quite significantly.
What they seem to be doing is exactly what
we talked about earlier, they seem to be saying
we need to, first of all, lower our import
bill in total and we seem to be essentially
becoming more focused on self-determination,
whether it’s iron ore or whether it’s chips
and we’re going to do that.
You’re seeing this entire trade slowing with
all of Chinese trade partners, not just the
United States.
That seems to be marking a major shift in
not just the trade war, but the global economy,
where China, in some cases, was responsible
for 50% or 75% of global growth in trade in
some of these areas and that’s essentially
been cut off.
MIKE GREEN: Yeah, I see it very, very similarly
and we’re just to highlight that if that was
actually happening, paradoxically, it would
be seen as a rising manufacturing surplus
for China.
It could be potentially perceived as China
is winning, but the reality is, is that happens,
it’s just the same description as a contract
manufacturer has positive cash flow once their
business starts to die off, because they no
longer buy any inventory, they run off their
working capital, they convert that into positive
cash, and that seems like a real win.
It also goes to this idea that China is going
to dump its Treasuries.
Going back to the 1936-’37 model, the Soviet
Union held on to US Treasuries and any foreign
reserves that it could get very fiercely because
they had no prospect of generating them through
efficient trade dynamics.
That was made easier because of the Soviet
Union’s raw commodity exposure.
It’s much harder for a manufacturing entity
like China.
As we look forward to the next year, you’re
going to be heading back over to Vietnam,
where you’ve been teaching for a while, we’re
going to get you back to the States so we
can check on this in 6 months to a year.
I’d love to have you back on.
I can tell you, in places like Vietnam, they
are actually actively cheering on the trade
It’s actually putting them in some industries
bumping up against capacity constraints, they
still have port space, but some other things
are being built out as fast as possible.
Yes, I’ll absolutely be coming back in the
next 6 months to a year.
MIKE GREEN: All right, fantastic.
Can we get you back on then?
MIKE GREEN: Thank you very much, Chris.
I appreciate it.

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